Every so often, I get an e-mail from a reader curious to know what company will be the next big player to shake up or join an industry. In response, I very rarely have something new to add to that conversation because I think it’s likely that Coca-Cola will be the next Coca-Cola, PepsiCo will be the next PepsiCo, and Dr. Pepper will be the next Dr. Pepper. Translation: The industry leaders in the beverage sector today will likely be there ten, fifteen, twenty years from now. It’s been no secret that I think they possess the brand equity and vast distribution networks to be around for a long, long time, and that is why they get mentioned as long-term investments here at the site so frequently.

But occasionally, there is a newcomer that is on the cusp of attaining blue-chip status, and it can be lucrative to recognize that opportunity while the rapid growth is continuing before the permanent settlement in the 8-11% annual growth range happens. The company I’ve had on my mind lately is Gilead Sciences, which seems to be in the late stages towards transitioning to that no-brainer pharma stock that you see in conservatively managed accounts, alongside Johnson & Johnson, Abbott Labs, Abbvie, GlaxoSmithKline, Pfizer, and a few others.

For those who are serious investors, Gilead is no new kid on the block, as it’s market cap is over $100 billion. However, it still hasn’t reached that point yet where a casual street investor thinking of buy-and-hold stocks off the top of his head will be familiar with the company. I suspect that once it gets around to initiating a dividend sometime between now and the next ten years, the company will start to show up as a potential investment on the screens of most dividend investors, pension funds, insurance companies, and so on.

The top-line growth at Gilead over the past decade has been absurd, in a better-double-check-these-numbers-because-that-can’t-be-right kind of way. Sales have grown by 40% annually over the past decade. Over the past five years, sales have grown by 28.0% annually, cash flow has grown by 24.5% annually, and earnings have grown by 22.5% annually. If Coca-Cola is the poster child for what dividend growth investing is all about, then Gilead Sciences is the poster child for what growth investing is all about. Every dollar invested into Gilead over the past ten years has turned into $13.28, creating a situation where a $75,000 investment into Gilead ten years ago could pretty single-handedly fund a nice retirement nest egg now valued at $995,000 (and since that would all be in the form of unrealized capital gains, there would be no tax to pay until you sell the stock).

My main concern right now is mostly about valuation. Back in July, I wrote this article for Seeking Alpha titled “Gilead Sciences Has A Realistic Path To $100.” Well, that didn’t take too long to happen, and the stock is now trading at $106 per share. Part of me wonders what the consequences would be starting a position here without a margin of safety in the stock price. The nature of pharmaceutical investing is this—companies come in and out of favor as a result of its drug pipeline. GlaxoSmithKline rocked it out in the ‘80s, and now it’s looking for that magic touch again. Pfizer dominated during its patent of Lipitor days, and now it’s searching for that next magic drug to propel earnings forward. In the case of Gilead Sciences, you are looking at a company that is rolling through an uninterrupted string of good news victories for its pharmaceutical pipeline. Heck, it’s now charging $1,000 per pill of Sovaldi for those that will be taking the Hepatitis C-fighting drug (although there are a lot of circumstances in which an individual can get the drug much cheaper).

For those with a value investing bent, you get your margin of safety when you establish positions either: (1) during general market pullbacks of the 2008-2009 variety, or (2) company specific bad news that leads to overreactions in driving the price down, creating an opportunity for long-term investors to plant their seeds when no one wants the stock. It’s the kind of attitude that would lead value investors to have a preference for buying Pfizer after Lipitor goes off-patent, Eli Lilly sees 15% declines in revenues, GlaxoSmithKline sees accusations of bribery and flatlining revenues, or something happens to drive the stock price down. Gilead Sciences has been hitting its stride for ten years running, and it’s hard to argue with someone who is following a strategy of patience—looking for a disappointing drug rollout, a couple quarters of low growth, or some other event to cause the price of the stock to dip before going in.

The pro side of the argument would be something like this: Gilead has a realistic chance of posting revenue growth in the 12-15% annual range over the coming ten years, and even if the stock is a little pricey now, someone who buys today could still experience 10-13% annual returns, better than what you’d expect from the S&P 500 as a whole. It has patents on some key drugs for at least the next six years, and as it is beginning to flex the muscle you’d expect from a $100+ billion company, a formidable research & development operation is emerging, which is now funded at a rate of 13% of sales. The company has unbelievable relationships when it comes to getting doctors to prescribe Gilead-produced drugs, and buying Gilead in the 2010s smacks of buying Johnson & Johnson in the 1950s, when the company was already large and pricey, but so dominant that it was primed to deliver returns of 12% annually for a long time thereafter.

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